Ex-hedge fund guy (and DealBreaker blogrollee)Andy Kessler, author of Wall Street Meat and Running Money, recently took time to talk to DealBreaker's Carolyn Okomo about his new book, The End of Medicine, a witty, engaging examination of the heathcare industry in the not-too-distant future.
DealBreaker: Finance and technology has sort of always been your thing. In The End of Medicine, you utilize your expertise to analyze the healthcare industry. Was this an easy transition to make?
Andy Kessler: I spent 20 years looking for ever cheaper silicon that could change industries. Over the last few years, I’ve gotten bored. Wi-Fi and Wikis are cool, but a little dull. So I started looking for something else besides computing and telecom and music and stock trading and banking that technology would surround, squeeze, suffocate old business models and reshape in its image. In the meantime, a friend was diagnosed with cancer, only because he banged his head on a mogul skiing and an X-Ray showed a tumor on his neck. And a brother-in-law had a heart attack in the middle of the night. I wondered if there was some technology that could find this stuff early, before it was life threatening. Us baby boomers (I’m a late boomer at 47) are entering that fragile age.
So I started following doctors around, cardiologists, radiologists, researchers at cancer centers and universities, looking for silicon. What I found was astounding (and quite funny; I live to tell funny stories which is most of the book). It’s really just starting.
Kessler, cont'd: It is doctors that are the problem with medicine. Why? Because they are human (after all), and humans don’t scale, they get more expensive. The trick is to embed their knowledge and expertise in silicon and software and algorithms and deliver it cheaper every year. And that’s what I found. Real time 3D imaging, neural networks to read mammograms, biomarker chips to scan for cancer cells in your blood, and on and on. We are at the early stages of a transition that will change healthcare over the next decade away from chronic care of today, and into a whole new early detection industry out of nothing. And do to doctors what ATMs did to tellers and ECNs did to stock traders.
And like Silicon Valley, Wall Street will provide all the capital (at not so modest fees) to fund this new industry’s growth.
What was the most fascinating thing you discovered while doing research for The End of Medicine?
That biology and technology are going to cross paths. Not in some weird “nanobot crawling around your gizzards shooting cancer cells sort of way.” More of a natural progression. CT scanners that used to build a 3D image of what your heart or lung or brain looks like have gone from 1 slice per rotation to 4 slice, to 16 to 64 with 256 slice machines due later this year or next. Those are Silicon Valley’s magic numbers. It means that medicine and healthcare might just be on the same curves, the same rate of innovation as PCs, ipods, digital cameras, etc.
You were basically on the search for technologies that scaled in medicine--things that were smaller, cheaper, faster, better. And, your investigation lead you to several different types of technologies--PET scanners and molecular imaging, slice scanners, R2s--lots of crazy machines. How do you think these things are going to scale?
That’s it. Smaller, cheaper, faster, better. The easy way to make money on Wall Street.
When I was an tech analyst at Morgan Stanley, or many other analysts had contacts, people who would whisper in their ear that a company’s quarter was on track, maybe the company would beat by a penny, etc. I didn’t know anybody, so I just ran around until I figured out what made the tech industry tick – was there some long term trend that I could stick with instead of working hard to see if the quarter was in the bag. I found it and (please don’t tell anybody!) milked it for the rest of my time on Wall Street. Every time chips got cheaper, which they do by 30% every year, some new application or market would appear out of no where to take advantage of the cheaper chips. Elasticity. Scale. Call it what you want. It works every time. Made my life a lot easier. I just focused on clients who wouldn’t trade out of their positions every day, owned things for years (they actually still exist on Wall Street if you look hard enough.) When my partner and I ran our hedge fund, we looked for this same scale in bandwidth. Now it looks like this scale is transferring to medicine. This is going to be fun to watch.
Let's talk about doctors and Big Pharma--two aspects of medicine you believe don't scale well.
Doctors and hospital stays go up in price every year. It’s almost unfair for technology to compete, because double digit rising costs in healthcare mean its easier for technology to undercut them. Pharma is a stranger beast. It could scale, but it doesn’t have the 1, 4, 16, 64, 256 rate of innovation. Drugs are one offs. And when they get passed the FDA, there is a race to milk drugs for all they are worth under patent protection before generics kill their high margins. You could argue that when drugs go generic, they are elastic, meaning you create a bigger market. Aspirin is on the last legs of a couple of hundred year cost reduction curve. Pretty wide spread market. But certainly not investable!
The trick is using silicon and machines to do things that doctors can't, like peek inside you and look for problems before they are life threatening. The Big Three in healthcare spending are heart disease, stroke and cancer. Blood pressure and cholesterol high? You may have a heart attack, but then again, you may not. How about looking at my arteries and seeing if there is blockage. That test is now doable, with the latest 64 slice CT scanners from GE and others, but it is still too expensive, and perhaps even not good enough of a test. Next generation 256 slice CT is out later this year or next and can scan your heart in 4/10ths of a second, one researcher just told me in less than 1/10th of second, creating a color 3D image of your heart that you and I can look at and find clogged arteries. These tests are $500-1000, so insurance won't pay for them. When they are under $200, give it 2 years, they will be mainstream and heart attacks will be a lot less common. Same for stroke. Cancer is harder to detect visually using CT or MRI scans, unless a tumor is so large that it will probably kill you anyway. But new techniques in the field of molecular imaging can find tumors 3-5 years early, when they are easy to treat. Antibody chips as cheap as 10 cents in volume will scan your blood or urine for unique proteins of cancer cells circulating in your body, alerting you of potential cancer when the cure may be as simple as zapping a tiny, invisible to the eye tumor.
Doctors can't do that, much as stock traders can't execute block trades in 4/10ths of a second like Archipelago and Instinet can do today. Technology not only makes things cheaper, but expands what is possible.
Millions allow a moil to do circumcisions every year, what do you have against T1000s? Robots are people too, just cheaper. The book doesn't really look at the future of robotic surgery, but LASIK eye surgery is already here.
There's a chapter in The End of Medicine called "The Cholesterol Conspiracy". In it, you take a pretty strong adversarial stance against statin drugs. You feel that pharmaceutical companies (and doctors) exaggerate their merits in reducing cardiac events--all (of course) to turn a profit. Why do you believe the high cholesterol/heart attack correlation is a sham?
Because the only inputs doctors use to prescribe statins are cholesterol and blood pressure. These are pretty weak indicators of disease. Wouldn’t it be better to just look inside patients and see of there are clogged arteries and therefore risk for a heart attack soon? Sure, but then only a tiny fraction would actually need statins. Better for Pfizer and Merck to keep the inputs fuzzy, cholesterol and blood pressure, rather than hard facts like a heart scan. As CT scans and the 3D imagery they create get cheaper and cheaper, they will replace those fuzzy inputs. $25 billion are spent on statins each year. Even at $1000 per CT scan, that’s 25 million scans that could be done each year.
You also say in your book that blood tests are, "the biggest scam going on in medicine." Why is that?
I was charged $220 for what amounted to pennies worth of chemicals run against my blood to tell me my cholesterol was a little high and that my albumen level was OK. Jeez, what a rip. Again, the same $220 can be better spent on looking inside, rather than keeping doctors flying blind with just fuzzy inputs.
So, by the end of The End of Medicine, the answer to scaling in medicine seems to be this: fewer doctors, fewer pharmaceuticals, more chips and greater investment in preventative care. Just how far do you think we are from this kind of medicine?
For heart disease and stroke, it starts right now, today. The technology exists and when 256 slice scanners are on the market that can image your heart in .08 seconds with almost no blur or artifacts, it will change how heart disease is detected.
Cancer is a long term project, probably 5 years to see first silicon on a device that can identify 4 types of cancer, then 16, then 64, etc. I think we are decade away from deployment of cheap enough chips to detect cancer cheaply, but between now and then, more biomarkers and more tests will be on the scene so that cancer rates are likely to begin dropping into the next decade.
In February, Siemens decided to redirect its capital towards two of its more lucrative divisions--one of those divisions just happens to be medicine technology. Do you think more companies will follow suit?
Absolutely, and Wall Street will applaud this.
Wall Street loves growth business, especially those with intellectual property. I am amazed how much access to capital the market allows biotech companies, on the hint or faint promise of future payments for intellectual property that may or may not be effective at curing cancer and other diseases. Once the business model for early detection is figured out, and it will be insurance companies that will (at some point) pony up for early diagnosis rather than pay for later chronic care. The numbers just have to make sense in the great spreadsheet in the sky. Once it does, someone at a hedge fund or on Wall Street will already have worked out the tradeoff and be ready to throw billions at this industry, that will save lives as well as save Medicare.
The stock market will love this stuff, once it recognizes the tradeoff between cost and care. In fact, let me be the first to predict the next great Wall Street bubble…